Interest Rate Swaps Go Standardized

Historically, interest rate swaps have been over-the-counter and had counterparty default risk. The Dodd-Frank Wall Street Reform and Protection Act requires that most derivatives go through a clearinghouse. In December, the CME (formerly the Chicago Mercantile Exchange) is debuting interest rate swap futures. Initially, the contracts will have 2, 5, 10, and 30 year maturities. At maturity, the contract converts into an interest rate swap. But, the purchaser or seller can reverse the position prior to maturity, which will allow for interest rate change hedging prior to maturity as well. While trading these futures will require participants to post margin. The advantages of these swap futures are a highly transparent market, the elimination of counterparty risk, and the access to liquidity to exit the contract at virtually any time.